Monday, December 17, 2012

Inovio (INO) is a micro-cap biotechnology company that is developing innovative vaccines and delivery systems. It has a market capitalization, today, of $71 million and the stock price closed at $0.51. (versus 52wk High/Low $0.90/$0.37; volatility is high)

Inovio's vaccines are aimed at difficult to treat viruses that typically exist in multiple strains. This means a specific traditional vaccine has to be developed to protect people from each strain. That takes times, and a new strain can emerge and infect a global population faster than a traditional vaccine can be developed. Inovio's SynCon vaccines are believed to provide cross-protection against multiple strains.

Results have been coming in on a regular basis from trials. In September Inovio announced an open-label Phase I study of its universal H1N1 influenza vaccine provoked immune responses "against some of the most prevalent strains of H1N! influenza from the past 100 years."

One veterinary subsidiary of Inovio reported its improved LifeTide DNA plasmid therapy for pigs to produces more piglets per litter, with higher birth weights, and at a lower dosage than the original version. A separate subsidiary in New Zealand received regulatory permission to market the therapy in October.

Also in October results from a VGX-3100 vaccine trial for HPV (human papillomavirus) showed 100% of 18 patients in the trial showed antigen-specific antibody response, while 78% showed T-cell responses. A phase II trial now underway will determine if the immune responses are able to reverse disease progression to cervical cancer.

In pre-clinical trials Inovio demonstrated that its electroporation technique for introducing its vaccines to skin using minimal invasion "induces robust cellular and humoral immune responses."

November was a busy month. First Inovio Hepatitis B (HPV) vaccine demonstrated the potential to clear HBV from the liver in mice in a pre-clinical trial. Another preclinical study showed T-cell immune response in Cytomegalovirus (CMV).

On December 6th positive Phase II interim results were reported in the leukemia trial. This could lead to treating CML (chronic myelogenous leukemia) with a vaccine. The results are from just 8 patients, with 14 patients currently enrolled and a total of 31 to be studied in the full trial. In addition to showing the vaccine to be safe. Patients received six does of two DNA vaccines at four week intervals. Tests showed T cells and leukemia antibodies were generated. Note, however, no data was released as to whether the patients responded to the therapy by delays in progression or the other usual indicators. In addition to CML, some of the patients to be enrolled will be suffering from AML (acute myeloid leukemia, a more common variety than CML).

Most recently, on December 10th interim Phase I results for H1N1 flu vaccine given to elderly patients were announced. 50 patients were in the trial, with two sets of 20 receiving the vaccine on differing schedules and 10 control subjects who received the traditional seasonal flu vaccine. Immune responses registered at 40% for the Inovio vaccine, double the rate of 20% responding to the traditional vaccine. It was previously known that elderly patients tend to not gain immunity from standard flu vaccines.

What is innovative about Inovio vaccines? They are DNA vaccines. Traditional vaccines consist of weakened or dead viruses or their protein coatings. DNA vaccines need to be inserted into cells (instead of into the bloodstream), but once there can trigger both antibody and T-cell immune responses. To insert the vaccines into cells Inovio uses an electroporation device it developed and has successfully tested. Inovio, in fact, resulted from the merger of a vaccine company and an electroporation developer.

It is important to note that all of the new data is from early-stage trials. To receive FDA approval for commercial sales of a therapy typically two successful Phase III trials are required. Inovio Pharmaceuticals is a developmental stage company with all the risks and uncertainties inherent in that status.

In addition to the recent news, Inovio has a Hepatitis C vaccine in a Phase II trial, and an HIV vaccine in Phase I. It has more cancer vaccine candidates: prostate in preclinical, and a breast/lung/prostate cancer trial in Phase I.

Despite the risk of failure common to all new biotechnology, I believe Inovio is more likely than not to be worth far more in a few years than it is now. Inovio has many shots on goal. Only one vaccine would need to be approved by the FDA to make Inovio a highly-valuable company.

Another risk for investors is that Inovio is likely to need to raise cash to complete its program of demonstrating the effectiveness of its vaccines, and to commercialize them. However, as of the end of Q3, Inovio had $15 million in cash, and some of the trials are being conducted, or paid for, by partners.

Disclaimer: I am long INO. I will not trade INO for 7 days following the publication of this article.

Keep diversified! You should also take a good close look at inovio.com and SEC documents before risking your capital.

Wednesday, December 5, 2012

Dot Hill (HILL) stock has been one of the worst performers in my portfolio lately. It is trading today at $0.88 per share, versus a 52 week high of $1.65 and 52 week low of $0.72. I have been invested in HILL for years, but more so than for most of my portfolio it has been a stock I have traded in, rather than just holding.

Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.

But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.

How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.

Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.

Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.

The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.

An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.

While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.

Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.

Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.

Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.

Monday, December 3, 2012

Gilead Sciences (GILD), has had a good year so far. On January 3, 2012 it opened at $41.46. Today it closed at 74.61, fairly near its 52-week high of $76.28. So up 84% this year. I used to write about Gilead more often during the years 2007 to 2011, arguing that it was undervalued. After finally getting a solid run up, is it time to bail out, hold, or buy more?

The forward-looking story is now largely about curing Hepatitis C, but first the latest backward-looking numbers.

In Q3 revenue was $2.43 billion, up 1% sequentially from $2.41 billion and up 14% from $2.12 billion in the year-earlier quarter. GAAP net income was $675.5 million, down 5% sequentially from $711.6 million, and down 9% from $741.1 million year-earlier. GAAP earnings per share (EPS) were $0.85, down 7% sequentially from $0.91 and down 10% from $0.95 year-earlier. Non-GAAP net income was $788.9 million, up 3% sequentially $767.3 million, and down 1% from $795.2 million year-earlier.

Profits did not keep pace with revenue growth because of costs from the Pharmasset acquisition from earlier in the year and a significant increase in R&D expense. Gilead is currently rolling out its newest HIV drugs like Stribild, which is helping revenue, but the R&D is not so much for HIV. The new R&D research is focused on hepatitis and oncology.

Why the emphasis on hep c? While Gilead Sciences has branched out into treatments for cardiovascular diseases, its primary expertise in in anti-viral drugs, particularly for HIV infections. Because of the effectiveness of its single-tablet, multi-drug combinations, Gilead dominates that market. Gilead also markets Viread for Hepatitis B. The past generation of Hepatitis C therapies have limited effectiveness, have a number of side effects, and cannot be administered orally.

Before the Pharmasset acquisition Gilead had four hepatitis drugs in phase II trials, and three in phase I, and said they would likely be made into a successful combination therapy. Pharmasset added Phase III candidate PSI-7977 (now Sofosbuvir), Phase II candidate Mericitabine, and Phase II candidate PSI-938, all for hep C. Pharmasset also brought candidates for HIV and hepatitis B treatment.

The latest set of results is for Sofosbuvir. The Phase 3 POSITRON study showed a response rate of 78% for hepatitis C (HCV) genotypes 2 and 3 when Sofosbuvir was combined with Ribavirin. It is notable that this is an all-oral regimen which does not include the using old standard, interferon. In tracking HCV note that a drug combination that works well with a particular genotype may not work with others. After 12 weeks of therapy and then an addition twelve weeks to see if the virus returned, HCV was not detected in 78% of patients. For those who are keeping track, Sofosbuvir used to be GS-7977.

Better still were the results from Sofosbuvir combined with GS-5885 and Ribavirin for genotype 1 HCV patients. Following 12 weeks of therapy and then 4 weeks without therapy, the response rate was 100%. Used with just ribavirin, Sofosbuvir had mixed results ranging from 84% for genotype 1 patients with no prior treatment down to only 10% response for genotype 1 patients who had not responded to prior treatments. For genotype 2 and 3 mixes, the range of responses was 60% to 68%.

Note that 100% cure rate is not necessary for FDA approval. As long as a combination can be found that does well with previously-untreated patients or that helps patients who were not helped by current therapies that include interferon, with about a 40% cure rate, the drugs could fulfill an unmet medical need.

At the same time it is a race, since other companies are also trying to break into the all-oral hepatitis market. It is a huge market. An estimated 150 million people world-wide have chronic hepatitis C, with the U.S. figure likely somewhere between 3 and 6 million (many people have undiagnosed HCV). For a less positive spin on the overall competition in hepatitis, I try Lessons from the Liver Meeting at Seeking Alpha.

Using the standard trailing 12-month ratio, Gilead's current P/E is 23.3. That is up quite a bit from earlier in the year. Conservative investors may want to wait until Gilead has actual FDA approval for a hepatitis C before extrapolating their chickens. As usual, the problem is by that time the stock may be priced even higher.

I don't think the current market has even priced in the true future value of Gilead's current drugs, much less the potential of a Sofosbuvir cocktail. In my particular case I feel comfortable with looking to the continued appreciation of my current holdings. I might still buy if the hep C data keeps getting better without a corresponding rise in the stock price. I have portfolio rules that restrict any stock to a maximum percentage of the entire portfolio, and could be forced to sell some if the stock rises too rapidly in price, though that seems unlikely at present.

Even with a great growth potential Gilead has, there are the usual risks from competition, macroeconomics, failure to receive FDA approval, etc.

Keep Diversified!

Disclaimer: I am a long-term investor in Gilead Sciences. I will not trade in the stock for a week from today.